Butch on a Budget

A while back I wrote a piece comparing buying our house vs renting in the same area. 

I want to revisit this but with a little more nuance because in that first post I left out an important component: Opportunity Cost. 

That post was already so long I didn’t want to tack a discussion onto the end. But it’s bothered me ever since that it wasn’t included. So we’re fixing that today. 

If you want to go through the process of how I got to the numbers I’m going to use here, go back and read that post first. 

First, what is opportunity cost? Opportunity cost is the value of the alternative option after choosing a different option when making a decision. 

In my original post, when we ran the rent v. buy analysis without factoring in the opportunity cost you were better off buying. BUT! We didn’t factor in the scenario of what the numbers would have looked like if you had invested the difference in your monthly cash flow. 

In order to figure this out, we’re going to use our down payment and closing costs amount – $56,338 – as an initial lump sum investment. 

Next we’ll add our cash flow savings from renting ($2,200 a month) rather than paying a high-interest mortgage and regular repairs and maintenance ($5,213 a month) – a difference of about $3,000 that can be invested instead. 

So if we take a $56,338 initial investment, $3,000 monthly contributions, and a 7% estimated interest rate for 3 years (that’s the time horizon I used in my initial article, since that’s how long I had been in my house at that point) we can plug those numbers into a compound interest calculator and see what our expected total would be. 

In the original post, three years after purchasing the house, you would have earned $169,741 between built equity and rental income (it’s a duplex). Once you factor in the cost of ownership, you came out ahead by just under $3,000 in the home buying scenario.

If you rented and invested the difference, you’d have nearly $185,000 in your investment portfolio after 3 years. Subtract the money you would have spent renting that whole time, and you still come out with $109,152 at the end of 3 years when renting. Much better than just under two grand. 

So, while interest rates remain high, and the rapid home value increases that we saw between 2020-22 seem unlikely to repeat, you just might be better off “throwing your money away” renting. As long as you invest the money you would have otherwise been spending on homeowners insurance, interest, and trips to Home Depot. 

However, like I said in the original post, you shouldn’t think about buying a home as an investment, it should be a lifestyle purchase. So, if you want to own a home, and you can afford it, then go for it!

Want to run through your own numbers to help see what makes the most financial sense to you? Schedule a one-off coaching call here!